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Summary

  • Coach beat analysts’ expectations of the fourth quarter earnings but the company failed to achieve any positive growth in its top and bottom lines.
  • Michael Kors is tough competition for Coach in both the North American and international markets.
  • The company needs to cut its costs and operating expenses in order to achieve better margins and positive earnings growth.

With its fourth quarter earnings result, Coach Inc.'s (NYSE:COH) fiscal year 2014 comes to an end. In this fiscal year the company's stock price dropped more than 33%. Though the company beat analysts' estimates it has performed poorly compared to last year's performance and its rival Michael Kors (NYSE:KORS).

Top-Line Growth

Coach reported net sales of $1.14 billion that were higher than analysts' estimates of $1.10 billion for the quarter. However, the sales fell 7% compared to the fourth quarter of FY13 in which the company reported net sales of $1.22 billion. The company's revenues were mainly affected by a drop in the North American segment where the sales fell 16% and the comparable store sales fell 17%. The negative growth is attributed to the challenging retail environment in North America.

However, the momentum was quite strong in the international segment, especially in China where the company experienced a net sales growth of 20%. Comparable store sales in China rose at a double digit rate but the sales declined 6% in Japan. Net revenues in the international segment experienced a growth of 7%, partially offsetting the decline in the North American segment.

Source: Company's press release

On the other hand, in the same period, rival Michael Kors received benefits from its shop-in-shop conversions and an ongoing momentum in its brand. Contrary to Coach, Michael Kors experienced revenue growth of 30% in the North American segment with comparable store sales growth of 18.7%, despite a challenging environment. The company's international segment received a boost from the 128% growth in the European segment and 89% growth in the Japanese segment. Total revenue growth for Michael Kors in the latest reported quarter was 43.4% bringing the revenue to $919.2 million, a figure considerably better than Coach.

Michael Kors' significantly improving sales and Coach's decreasing sales clearly show that its position in the market is now highly vulnerable. Through its expansions strategies, Michael Kors is proving to be tough competition for Coach in the North American market and has also become tough competition in the Japanese and European markets.

Coach's full year performance was also disappointing. For the full fiscal year 2014, the company's North American sales declined 11% with comparable sales falling 15% while international sales rose 6% due to robust Chinese sales. Net sales in this fiscal year declined 5.3%.

According to Coach's CEO, despite some challenges, this fiscal year also brought some accomplishments for the company including the successful integration of the retail business in Europe and robust sales growth in the Chinese segment and men's segment globally. Moreover, the company's management also laid the groundwork for the brand's transformation. These strategies are expected to bring some growth to the company's top line by attracting the lost customers in the North American segment and increasing the customer traffic in the already profitable international segment.

Margins and Net Earnings Growth

The slump in sales growth led to negative bottom line growth. The icing on the cake was the increase in Coach's expenses, which led to depressed margins and negative earnings growth. Its cost of goods sold jumped by more than 1,000 basis points depressing the gross profit for the fourth quarter compared to the figure reported in the fourth quarter of FY13. The selling, general and administrative expenses as a percentage of sales rose by around 680 basis points. Together, these factors caused the operating margin to significantly decline to 8.782% compared to the operating margin of 25.99% reported in the fourth quarter of FY13. Net margin dropped to 6.63% over the year from 18.103% in the same quarter of the previous year.

Coach's net earnings in this quarter faced a sharp decline of 66% and stood at $75.275 million compared to $221.343 million in 4Q13. Per share earnings were 27 cents. However, after making adjustments for transformations and other related actions per share earnings stands at 59 cents exceeding analysts' expectations of 53 cents. The actual earnings were considerably lower than 89 cents per share reported a year ago.

The full year net earnings declined approximately 25% year-over-year due to the same factors discussed in the quarterly earnings segment.

Final Thoughts

Coach has once again disappointed investors by posting negative revenue and earnings growth and deteriorating margins. The company's management is trying to transform its business model and integrate the European business to attract its lost customers and to regain its lost market share. These factors would help the company to attain some growth in its top line but now Coach cannot get back its previous position of being the market leader as the competition in the sector has become intense. Michael Kors is tough competition especially in the North American and Japanese markets.

Moreover, the company's problems cannot be solved by increasing customer traffic in its stores. The company direly needs to cut its costs and expenses which have significantly deteriorated its margins over the year. Therefore I would not suggest investing in the stock until the company's management devises and implements some effective revenue and cost-cutting strategies.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.

Source: Coach - Expensive Valuation And Facing Intense Competition

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